Archives for August 2007

Workers Comp Class Codes – Quick Primer On Important Policy Term

August 30, 2007 By JL Risk Management Consultants

Workers Comp Class Codes Quick Primer

The Workers Comp Class Codes are also known as Class Codes, Work Comp Codes, Codes, etc. Today, let us start with the definition of the Class Codes.

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As I mentioned in my last post, the errors that we find have a common theme to them, which are Classification Codes. In laypersons terms, Classification Codes are how a Workers Comp carrier and the NCCI or your state rating bureau views your business operation. For instance, a trucking company may have a Classification Code of 7228 – which are short-haul truckers.

There is a very important point that needs to be made now. Your Classification Codes are not the same as your SIC codes. Your Work Comp Class Codes should not be based on your SIC codes. Quite often very small employers start out by doing a self-audit on their payroll and job types. When they grow, the Class Codes that are used year after year may have been based on the owner’s self-audit and description of the company.

Agent With Man And Woman Workers Comp Class Codes Discussion

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This is not to say that the insured, NCCI, agent, or insurance carrier did anything wrong. Quite often, the Classification Codes are just copied from year to year by the agent. What if you change course in what your business is doing, or if the NCCI or your state rating bureau performs an in-person audit? I am not talking about the premium auditor that does a yearly payroll audit. Do your Classification Codes have quite a few NOC’s (Not Otherwise Classified)?

A great example is a firefighting company that we assisted that was classified as a water carrier. Why? They had Water in their name. As they were a small company, they were audited over the phone year after year. The firefighters now pay over 60% less in Workers’ Compensation premiums after we were able to convince the State Rating Bureau and their insurance carrier of the mistake. Who was to blame? This was just the natural Work Comp insurance process that went slightly awry.

The main area I wanted to cover here today, which should have been covered last Friday, is how to tell if your Classification Codes are wrong. This is a very tough one, but here are some observations that we had while reviewing Workers Comp policies:

You have NOC in your Classification Code
The Classification Code is not what you do in your business.
The NCCI or State Rating Bureau has never inspected your business
Sometimes the Class Codes can be wrong if you have just been inspected (Catch 22)
The NCCI, Insurance carrier or Insurance Company Payroll Auditor has abruptly changed your Classification Code
Along with the abrupt change, you receive a very large Workers Comp premium bill
You have two or more very distinct businesses that are being classified in one “umbrella” class code
Your competitors are being classified differently
The #1 way to know is that you or someone in your company has a gut feeling that your Class Code is wrong, or there is something that is wrong overall with your Workers Comp insurance policy – that is when we receive most of our calls and emails, and gut feelings are right about 80% – 90% of the time.

Picture Hand Pointing Web Workers Compensation Classification Codes Concept

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I will add to this list as time permits. Those are the ones that I can remember off the top of my head. I am on the road this week traveling to the West Virginia NCCI Conference.

West Virginia has come a long way from a monopolistic state for Workers Compensation to a fully open market. Brickstreet has been the interim monopolistic private carrier for the last two years and will be the carrier until July 1, 2008.

Brickstreet will be the carrier for some of the West Virginia state agencies until July 1, 2010.

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Auditing Workers Compensation Policies – Main Errors Discovered

August 29, 2007 By JL Risk Management Consultants

Main Errors – Auditing Workers Compensation Policies

Auditing workers compensation policies involves many steps.

Picture Word Game Magnifying glass auditing Workers Compensation Policies terms

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We have examined a large number of Workers Compensation policies in our existence. We find errors auditing at least 50% of the time. The most common errors that we have seen are (in order from most common to least):

Over-reserving or not closing files timely (see previous post on Total Incurred)
Employees misclassified into the wrong classification code
Governing classification code wrong – very expensive
Subcontractors classified as employees
Wrong payroll items counted as Workers Comp remuneration
Two or more distinct businesses classified as one business

When you are auditing your Workers Comp insurance policies and loss runs, please remember that there are 130 variables that go into a claim, and there are 34 steps to taking the Total Incurred and converting them into your E-Mod or X-Mod.

Hand Presenting Auditing Workers Compensation Policies Concept

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Then, there are approximately 1o more steps once you have your Experience Mod to calculating your premium. As each of the variables feed into each other, you can multiply them to see what a chance of error would be for a given Work Comp policy.

130 * 34 * 10 = 44,200

Hold on, though as that is for one claim figuring into your premium. If you have 20 open claims, then you would multiply 44,200 * 20 = 884,000

So, there are 884,000 calculations or variables that must all be correct for you to pay your correct premium. Are you still willing to just write a check to the Workers Compensation insurance carrier?

I wrote about the Self-Insured Phenomenon yesterday. At this point, if you are self-insured, are you thinking that you’re OUT of this type of system? The actuary that sets your LDF’s or Loss Development Factors has as many variables and combos to examine. If you are self-insured, then the number of open claims may possibly be even higher.

I will talk about each of the above errors in auditing workers compensation policies over the next few days. Notice how many times the word Classification is in the above list.

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Self-Insurance – Workers’ Comp Phenomenon That Can Ruin Budgets

August 28, 2007 By JL Risk Management Consultants

Self-Insurance Phenomenon Kills Company Budget

Self-insurance was an area I used to not cover as well as it should have been covered that when I had written articles, manuals, or presentations.

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I coined the term “Self-Insurance Phenomenon” after hearing these comments and auditing self-insured files for private companies and governmental entities. This is one area that I have become concerned about in the past few years.

A large percentage of our clients that have chosen self-insurance and have TPA’s (Third Party Administrators) handling the claims seem to think that they have found some sort of safety net vs. using traditional insurance policies. The expression “We are with a TPA, so we are not really paying insurance premiums” is one of the phrases that employers have said to our company personnel often. This is a grave mistake, as the TPA is spending directly from the employer’s budget, sometimes without enough oversight.

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TPA’s also charge a fixed amount per year to handle the claims that must be in the calculations to compare TPA vs. Non-TPA insurance decisions. Under audit, we have found very poor claim handling from TPA’s that are not usually found in the general WC claims environment. This is not to say that all TPA’s are bad. Reviewing the claim payouts very often is recommended.

A twist of the same type of thinking is “We have a large deductible, so the insurance carrier only pays after the claims reaches a certain level of $.” The insurance carrier still reports your claims to NCCI under a large deductible. As far as NCCI is concerned, you are not self-insured when you are in a large deductible program.

Another comment we often hear from self-insureds is, “we only pay the TPA $X per claim per year to handle our claims.” As covered in my upcoming manual -there are many charges that a TPA adds in that regular insurance carriers cover in their premiums charged. We have seen the extra charges to be up to 5,000% of $X.

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Automated Reserving Programs Work Better Than Claims Adjusters?

August 28, 2007 By JL Risk Management Consultants

Automated Reserving Programs For Workers Comp – Better Than An Adjuster?

I received this question on automated reserving in response to yesterday’s post.

Graphic of Ohio Automated Reserving Written In White Tiles

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You had said there are no guidelines for a Workers Compensation Adjuster to set the Workers Comp reserves on a file – How about the automated reserving programs that are available? Do they work, and are they accurate?

Answer – I have seen some of them, and audited files, where automated reserves are set. They are no more accurate than the adjuster setting file reserves on their own. A great example is when we audited files for an Ohio client. Ohio is monopolistic. At the time, they were using an automated reserve system.

The reserves/Total Incurred for the files were not that accurate.One of the reasons is the adjuster needs to update what is going on in the claim just as if the carrier was non-automated on reserves. The bottom line is the employer was still paying the same premium regardless.The reason? – There are over 130 variables that go into a Workers Compensation reserve.

Software Automated Reserving Laptop And Cellphone Graphic

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The software is only taking what it is given, so the reserves are only as accurate as what the adjuster inputs into them. BTW, the BWC of Ohio (Government-ran monopolistic Workers Comp Carrier) is and has been under investigation. What was one of the complaints? -inaccurate file reserves.

Update 6/24/2017 Believe it or not, I wrote this article almost 10 years ago. Today, still no automated reserving programs exist that predict the reserves of a Workers Compensation file. My take on it – the human body heals differently for each individual person. Thousands of variables must be taken into account when the human body heals. I will update this article when I observe any accurate automated reserving programs.

07/25/2018 – Reserving analytics have still not yet arrived on the workers compensation scene. I have sampled two and the reserving algorithms have improved, but still cannot outperform an adjuster at workers comp reserving.

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Your Workers Compensation Budget – Who Really Is In Charge?

August 27, 2007 By JL Risk Management Consultants

Workers Compensation Budget Comes From One Group

Who is in charge of your Workers Compensation budget that is 100% unregulated?

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Is it your agent, underwriter, premium auditor, or insurance commissioner? No, not any one of those parties, as they are all under some type of regulation. The unregulated part of Workers’ Comp premiums is (drum roll) – your Work Comp insurance adjuster.

There is a long previous posting on Total Incurred. To not bore anyone to tears, I left this part for today. Your insurance adjuster needs to be licensed in most states, but there is no regulation on the reserves/total incurred they set on your WC claims.

What are the guidelines for setting reserves on a WC claim? There are none. As I mentioned in the last post, whatever your total incurred is by the 180th day after your policy period expires is what you pay for your Workers Compensation premiums – plain and simple.

Picture Hand Pointing Workers Compensation Budget Globe

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What do you do immediately to make sure you have no overcharges in your premiums?

Find your monthly or quarterly Workers Comp Loss Run from your insurance carrier and review it.
If you do not have one, request it ASAP.
Make sure that all claims that should be closed are closed.
If a total incurred or reserves look very large for the claim, email your adjuster.
Do you know who the adjuster is on every one of your claims?
Do you have a working relationship with that adjuster?
Do you have their email address?
If you feel you need further help, consult with a claims expert- we are claims and premium consultants. Please excuse the J&L Risk Mgmt ad.

If you answered No to #4 – #6, are you just writing checks to the agent or carrier? There is no need to just think of Workers’ Compensation as a fixed cost to doing business. There are more areas to reduce your premium, but this is the one that costs your company’s workers compensation budget the most.

Experience Modification Factor – Calculating Your WC Premium

August 24, 2007 By JL Risk Management Consultants

Experience Modification Factor Calculations

The Experience Modification Factor calculations consist of four main areas.

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As I mentioned in a prior post, your Workers Comp premium calculations include 34 steps. However, those are the steps just to calculate your Experience Modification factor, also referred to as an E-Mod or an X-Mod.To make a very long story short, there are four main elements that determine your E-Mod:

total incurred
claim frequency
classification codes
amount of payroll per classification code

The payrolls per classification code are the basis for what is referred to as “Expected Losses”

Why was the Total Incurred from the last post so important? The Expected Losses are divided by the “Actual Losses” to calculate your E-Mod. Actual Losses are derived from the claims’ total incurred. The lower the total incurred is, the lower your actual losses. The lower your actual losses, the lower the E-Mod.

An E-mod is calculated on the total incurred SIX months after the close of the policy period. If you have a January 1st renewal date, the State Rating Bureau or the NCCI will calculate your E-mod on 7/1. How can you be charged for premiums six months after your policy has ended? Actually, you aren’t, as Workers’ Compensation runs one year behind.

Graphic Calendar January 1st Experience Modification Factor Calculations

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If your renewal is 1/1/08, your Experience Period is from 4/1/03 through 12/31/06. Any policies that started 4/1/03 and ended by 12/31/06 will have an effect on your 1/1/08 renewal for your 1/1/08 – 1/1/09 policy period. The Experience Period runs out on 6/30/07 at the close of the business day. Usually, If the reserves/total incurred are reduced by $1,000,000 on 7/1, that big chunk of $ will still show up on your E-Mod and eventually your premiums, even though it was reduced the next day.

I know this info is about exciting as watching grass grow, but it is cold hard cash we are talking about with your premiums. We will come back to the Experience Mod later. Whew! That was enough numbers for anyone to have to look at for some time.

Coming up next week:

Monday – The Unregulated Part of Your Work Comp Insurance Premium – you and the government/Department of Insurance have no control over it, and it can kill your insurance budget. Only one person has control, and it is not your Workers Comp insurance agent.
Tuesday – The Self-Insurance Phenomenon – shocking but true.
Wednesday – The Main Errors We Find When Auditing Workers’ Compensation Policies

***Please note that any of the terms in this post or others can be found at https://cutcompcosts.com/ under the Definitions tab.

Workers’ Comp Costs – Six Keys To Saving Premiums

August 21, 2007 By JL Risk Management Consultants

Reduce Your Workers’ Comp Costs – Six Keys (updated)

Update – Six Keys To Saving on Workers’ Comp Costs.

Picture of Piggy Bank Workers' Comp Costs and Money

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The mainstay of all my presentations is the (used to be three) “~~Five~~ Six Keys to Saving on Workers’ Comp Costs.” This is a time-tested list that will reduce Workers’ Comp costs for any employer in any jurisdiction. These come from over 20 years of analyzing claim costs, and a study that I performed with over 7,000 Workers’ Compensation files. They are:

Timely Filing of the First Report of Injury – within 24 hours- this is easy to fix. Your company’s operation manuals should have a section on handling and reporting injuries. Your operations manual training should contain a section on reporting injuries.
Physician’s Network – where does the employee treat? Your company operations manual should have a section on where to send the injured employee if injured or seriously injured.
Return to Work Program – prevents large cases. All companies should have a return to work program. The physician network should have a copy of all job descriptions known as a job bank.
Employee Treatment by Employer, Doctor, Adjuster – reduces malingering and fraud. Trust by the employee makes the first three keys more easily attainable.
Making Workers’ Comp a Priority – do you just write a check to the TPA or carrier? Taking WC off the back burner usually results in savings.
Understanding The Premium Audit Process- how your final bill has been calculated. The Premium Audit is the final bill from the carrier. Many articles in this blog have been written on premium audits.

I found that in a study of the 7,000 Workers’ Compensation files, that if an employer does not do just one of #’s 1 – 4, the claim cost will increase by 400%. And yes, if none of the first three are done properly the employer will pay 1,200% more than a similar employer that is attending to all of the first three of the five.

I will cover all of them individually over the next five weeks. I will be releasing a manual in the next month that goes even deeper into detail.

Tomorrow – How is Your Workers’ Compensation Premium Calculated?